You might think calculating the costs of accidents and incidents in your workplace is pretty straightforward. But that’s not always the case. Whether you’re re-examining your hierarchy of safety controls or looking at what the ISO 450001 cost is, you still may be missing part of the story when it comes to the true costs of workplace accidents to your business.
It’s an all-too-common error to focus on measuring the direct costs of these incidents, like medical expenses as a result of a workplace injury. But these represent only a mere fraction of the true cost. Only when you assess the indirect costs, like a loss of productivity while workers recover from injury, do you get the full picture.
Let’s start differentiating between direct and indirect costs and work out what such incidents are really costing your organisation. We can explain using the iceberg principle.
The iceberg principle illustrates that there is more than meets the eye. What you can see is only a fraction of what’s hidden below the surface. In the case of workplace safety, the direct costs of an incident in your workplace is the part of an iceberg that’s visible above water. They’re more obvious, easier to measure, and only represent a small percentage of the true cost of an incident.
The indirect costs are the unseen parts of the iceberg below the water. These are the parts that are hidden beneath the surface, less tangible, and make up the majority of the cost of an incident. Importantly, it’s these costs that can add up quickly and have a significant impact on your company's bottom line.
What is the real cost of an incident?
When calculating the true cost of an incident, it's essential to consider both the direct and indirect costs. Focusing only on your direct costs is a common mistake. It provides an incomplete picture of an incidents impact on your organisation's finances and operations.
Since direct costs are any expenses that can be directly attributed to an incident, they typically are easier to measure. The direct costs of an incident are often covered by insurance policies and can be quickly calculated.
Examples of direct costs can include:
- Medical expenses
- Property damage
- Sick pay
- Workers' compensation claims
- Fines and penalties
Indirect costs, on the other hand, are much more difficult to measure. They are the hidden costs associated with an accident or incident. These costs are often less visible and harder to quantify. They can have a ripple effect throughout a company and impact everything from employee morale to the company's reputation.
Indirect costs may include:
- Lost productivity
- Legal fees
- Increased insurance premiums
- Training and retraining costs
- Administrative expenses
- Reputational damage
What are TRIR and LTI and why aren't they enough to drive change?
TRIR (Total Recordable Incident Rate) and LTI (Lost Time Injury) are two commonly used safety metrics in the workplace. TRIR measures the number of recordable incidents per 100 workers in any given period, while LTI measures the number of incidents that result in lost time from work.
While these metrics can be useful in tracking incident rates and identifying trends, they don't provide a complete picture of a company's safety performance. TRIR and LTI only measure the direct costs of an incident and don't take into account the indirect costs that can have a more significant impact on a company's finances and operations.
To truly drive change and improve safety performance, businesses need to look beyond traditional safety metrics and consider the full cost of an incident. By understanding the hidden costs of incidents, you can make more informed decisions about safety investments and identify areas for improvement.
What’s the best way to really calculate your indirect costs?
Calculating indirect costs can be a challenge as they are often less tangible and more difficult to quantify. But we suggest it is always possible.
A top tip is to try calculating standard figures that you can apply to each common indirect cost. For instance, determining an hourly cost of employee time spent on dealing with incidents. Make sure to also include the impacts on sales in your calculation. Estimate a loss of profits as a result of any loss in productivity or reputational damage.
Conduct a thorough investigation of each incident and follow the three steps below.
- Identify the cost drivers: Organisations need to identify the factors that contribute to indirect costs. This includes lost productivity, decreased morale, and increased absenteeism.
- Estimate the costs: Once the cost drivers have been identified, organisations need to estimate the associated costs. This can be done by analysing data such as absenteeism rates, overtime costs, and the cost of hiring and training replacements.
- Calculate the total cost: Once the indirect costs have been estimated, organisations can calculate the total cost of an incident.
Can a digital solution bring down your indirect costs?
Better understanding the true cost of accidents and incidents is made easier with a digital EHS solution. Access to EHS software can provide you with a more accurate picture of the impact that incidents have on your operations and finances.
The following benefits of an EHS solution can make indirect costs more visible while helping to minimise their impact:
- Incident Reporting: Making switch from pen and paper to allow for digital incident reporting will help to drive employee engagement and allow you to investigate incidents and accidents quickly and accurately. This crucially minimises delays for investigations, helping to reduce your indirect costs.
- Mobile capability: Empowering your workers with a mobile app allows your employees to enter data at the point of an incident. The user-friendly nature of a mobile app can increase the speed of incident reporting and user adoption, thereby mitigating your indirect costs.
- EHS Risk Assessments: If your organisation is still undertaking risk assessments on paper or in a word document, you need to ask yourself this question – how many hours are you losing to countless admin? That's before you consider not having access to a centralised system. Some teams can be left to manage numerous paper based or excel risk assessments scattered across multiple locations, with no way of ensuring that the most recent version is being used. Giving your team the right digital solution to conduct risk assessments will reduce the impact on indirect costs of accidents.
- Crisis Manager: When an incident strikes, you want to ensure that your crisis and emergency response plans are easily accessible to the employees who need them. Having this in place will help to provide a quick return to normal business operations after an incident and re-establish your compliance. Having this as part of your digital EHS solution will help to minimise impact on your business reputation and nullify any indirect costs.
- Learning Management: Having an integrated system for learning can help to reduce training and retraining costs while cutting down on administrative expenses. The ability to auto-enrol employees to relevant courses and have full oversight of training gaps and requirements will not only help to ensure your organisation is compliant, but that indirect costs can be minimised.
Of course, all these points help to prevent accidents and incidents in the workplace to begin with, which is the best outcome for your organisation's finances, operations, and people.
In conclusion, looking beyond the direct costs will help you to identify the indirect costs that may be lurking beneath the surface. Having this comprehensive approach will help you to gain a better understanding of the true cost and the impact on your organisation. Getting access to the full picture will help you to make informed decisions about where to invest in safety and where to focus your efforts to help reduce incidents.